The Rising Cost of Pharmacy Benefits

February 11, 2019 Danielle Ashbaugh

8 Minute Read

 

Introduction

 

Pharmacy benefits costs aren’t always front of mind for employers and employees. In the past, the cost of offering pharmacy benefits wasn't a significant portion of overall health care spending. But given the rising costs, it’s prudent for employers to increase their oversight and monitoring of pharmacy benefits plans to try to keep overall health care costs down.

 

Recent Health Affairs research found that "national health spending is projected to grow 5.5 percent annually on average in 2017–26 and to represent 19.7 percent of the economy in 2026."1 The need for benefits managers to manage these costs is increasing rapidly.

 

Here are the key trends to pay attention to as you aim to control costs in this rapidly evolving landscape.

 

 

The Importance of Audits

 

Auditing financials has always been a critical part of fiduciary responsibility when it comes to  managing a pharmacy benefits plan. That is why performing financial audits at least once in a three-year contract term is important to making sure pharmacy benefit managers (PBMs) are held to their contractual obligations.

 

Besides auditing financial obligations outlined in the contract, we highly recommend auditing rebates. As the industry has evolved, one thing that has changed considerably is the value of rebates in helping reduce total plan costs. Rebates often represent the greatest part of drug savings to a plan. While there’s a lot of uncertainty around what’s happening with rebates, verifying that your plan is getting the maximum value from rebates is critical. Now is the time to consider doing a rebate audit.

 

High-deductible health plans (HDHPs) are another key element to consider. HDHPs add a lot of complex elements to pharmacy benefits plans — such as deductible, maximum out of pocket, preventive drug lists with zero co-pay bypassing the deductible, accumulators that can be either separate or combined with the medical plan and so on. With an increase in the number of individuals enrolled in HDHPs, it is important to verify all these complex elements are implemented and function properly early on before any significant member/plan impact occurs.

 

 

The Role of Effective Contracts

 

Effective contracts include the ability to audit benefits when you need to and establish the costs associated with doing so. Companies often restrict audits, which affects the costs associated with pharmacy benefits. Contracts cover who can perform audits, when audits can be done and how many contracts can be examined during an audit.

 

An effectively negotiated agreement is key to managing pharmacy benefits costs and responding to the rapidly changing pricing dynamics. An effective contract results from an effective procurement strategy.

 

Good contracting involves several elements:

 

  • Getting the best unit costs and savings for your specific population.

    While you can negotiate audit rights and privileges, your opportunity to negotiate those sorts of factors when renewing with your PBM is limited. Doing an RFP where you establish specific contract requirements to get the best unit cost or best pricing for your pharmacy benefits plan is a highly effective contracting strategy.

 

  • Creating enforceable terms and definitions.

    Your goal is to protect you, the client, in the agreement. You want to ensure that you end up with a contract that's enforceable and not ambiguous.

 

  • Maintaining the right to evaluate performance.

    Aside from auditing the benefits of the plan, it’s important to be able to examine the contract from a discount, savings and service perspective. This allows benefits managers to determine clear accountabilities on the part of the PBM when they fall short of their obligations.

 

Anticipating the Future of Pharmacy Pricing

 

Uncertainty and changes to pricing dynamics will continue to impact pharmacy benefit plans, and employers will need to stay one step ahead of these changes to control costs.  A number of complex, moving parts are affecting long-term trends in the pharmacy pricing market. Here are a few key questions you should be asking.

 

What If the Market Moves Away from a Rebates Model?


Although rebates are a proven tool in lowering overall prescription costs, some experts are concerned with the price distortion they can cause, and they suggest rebates may actually decline in popularity. At the very least, market forces are beginning to drive a reshaping of rebates that may mean changes in point-of-sale rebates, more direct benefits to members and more visibility in rebate discounts. These changes could improve the overall health of the pharmacy pricing market, but in the meantime the threat of these changes is causing uncertainty for those managing pharmacy benefits plans.

 

How Might Outcomes-/Value-Based Contracting Affect the Funding of Your Plan?


The market has been experimenting with outcomes- or value-based contracting, with some successes and some failures. But for now, it’s unlikely to pose a viable alternative to the current system because of the complexity of the factors that affect health outcomes and the difficulty in translating those factors directly into pricing models. It’s a trend to watch but not one that’s going to radically overhaul pharmacy pricing models in the short term.

 

Why Is an RFP the Best Way to Prepare for the Future When There Are So Many Unanswered Questions?


Given the flux of the pharmacy pricing model and the number of unknowns that will affect those prices in the future, RFPs are still the best way to be proactive about pharmacy benefit plans and hedge your contracts against potential changes. Continuing to stay on top of these changes through a regular RFP cycle every two to three years results in the best outcomes, even with all of the market changes.

 

How Does the Vertical Integration of PBMs with Their Insurance Carrier Partners Change How We Think About Pharmacy Pricing?


The possible turn toward a “total cost of care” model has significant implications for pharmacy pricing. The trend toward vertical integration of companies like CVS, Cigna and ESI further complicates the pricing dynamics. There is a lot of uncertainty about vertical integration and how it will affect pharmacy pricing in the long run, but one thing is certain — it won’t simplify the buying or contracting process, nor will it simplify the financial structures of pharmacy benefit plans.

 

Given the changes in the pricing dynamics over the past 10 years, benefits managers face an increasingly complex fiduciary situation with enormous responsibility that requires the highest level of expertise to help them fully provide the level of oversight and monitoring needed. That’s why understanding the role of audits, effective contracting and regular RFP cycles is so important to managing pharmacy benefits. These strategies apply pressure on the market that helps keep costs down for employers and employees.

 

The pharmacy space is very dynamic and complex. Without an expert in the field, plan sponsors will face challenges navigating this process alone and might not be able to fully realize significant extra savings when negotiating new PBM contracts. Failure to set things up correctly during the early stages could lead to unnecessary spending down the road. Most importantly, it is essential for plan sponsors to have a solid long-term strategy in place to ensure the health and success of their benefits program.

 

Please contact the Aon Pharmacy Services team to learn more.

 

1 Health Affairs, National Health Expenditure Projections, 2017–26: Despite Uncertainty, Fundamentals Primarily Drive Spending Growth, 2018

 

 

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